The Inoculated Investor http://inoculatedinvestor.blogspot.com/
ever since Ben Graham was alive. Modeling techniques are just different ways of looking atthe same thing.
Said he knows of a company with 80% gross margins and 30% net margins. The stocktrades at 8x EPS
net of cash. There is no other company that is statistically so cheap and has such greatfundamentals. Of course he is talking about Microsoft (MSFT). The stock has been a value trap
flat overthe last 10 years despite revenue growing 150%. It is one of the best companies in the history of theworld because it generates infinite returns on capital. You will never find a better company.Then why is it so c
heap? He doesn’t think it s
—that’s why they own it.
But, no spreadsheet cananswer that question or any of the following. Is this a company at the very tail end of its growth story oris it an incredible growth company? Is it going the way of newspapers? Is technology passing it by? Inother words, is MSFT declining? Tilson does not think so. The company is still growing right now becauseof Windows 7 and Office. The consensus view is that it is a lumbering dinosaur being leapt by Apple(AAPL) and salesforce.com (CRM). Betting against the consensus is very hard psychologically. You canlook very dumb for a long time. The crowd is right more often than it is wrong. You have to bet againstthe crowd and be right to make money
. That’s the hard part—
the second one.
Question 5: John Manginn-
Does your circle of competency come in to help avoid value traps?
: The 1
question they ask is whether the company fits in their circle of competence.They look at dozens of companies each week and ask: is this in their circle of competence? Buffet is 80years old and is expanding his circle of competence every year. Some recent examples of new Buffetcompanies include Iscar, BYD, and PetroChina (PTR), and Lubrizol (LZ). He has been buying cyclicalcompanies that he would never have invested in 5-10 years ago. He is actually getting better with age.Your circle of competence does not have to be huge as long as you know its boundaries. But, the widerthe net, the better chance you have of finding hidden gems. Glenn Tongue (his partner at T2 Partners)and Whitney have 40 years of
combined experience but don’t invest
much in biotech or internationalstocks. You have to be humble about it because you can get clobbered when you stray outside yourcircle of competence. In some recent cases they found out that they were the sucker at the poker table.But, it was not their spreadsheets that let them down.
People fail wh
en they don’t know when to sell a stock. A
stock can do well but people
based on their circle of competence what the value truly is. It is easy to lose money that way.
Know what you know and what you don’t know.
It is nice to expand your circle of competence but you don
always have to. Inmany cases, you can find great companies outside of the US
not in China or Russia. He is talkingdeveloped companies (like some in Europe) where there is a rule of law and democracy. You have toexpand the pond you fish in without taking too much risk or needing to expand your circle of competence. However, you will be taking a new risk
currency risk. For example,
(HPQ) revenuescome largely from outside the US so you have currency risk there. If you buy a UK company then youhave risk of the pound crashing. You can diversify to mitigate that risk. His advice is to stay in your circleof competence but increase the pond in which you fish.
When you are looking within your circle of competence you find other opportunities inareas that you do not expect. Right now, very overcapitalized banks are trading at book value or belowbook value and have great loan growth, even without the trouble the big banks have had. Further,Bladex is bank in Panama that he mentioned last year. It has a New York subsidiary so the company is